Last Updated: Wednesday, 29 August , 2007, 08:49
For
long-term capital gains earned on sale of property, the tax rate is 20
per cent. If the value is above Rs 10 lakh, the tax rate climbs to
22.66 per cent. This applies both to residents as well as non-resident
Indians (NRIs).
Sec. 54 of the Income Tax Act offers a way out of paying such
tax. If the capital gain amount is invested in a residential house
within one year before to two years after the sale, then the capital
gains earned are fully exempted from tax. In case the investor intends
to construct a house, the time limit is extended to within three years
of the date of sale. Of course, if only a part of the capital gain is
used, the exemption would be proportional and the excess will be
chargeable to tax.
So far, so good. Now comes the interesting part, especially for NRIs.
Nowhere does Sec. 54 specify that the new house purchased should
be within India. This means, to save capital gains earned in India, the
NRI can even purchase a house in his or her own host country abroad and
yet claim exemption. Why just NRIs, now even resident Indians can
benefit from this rule. RBI allows an Indian resident up to $1,00,000
per annum to be invested abroad. Such investment could be even in
property.
So far, this was just a theoretical possibility based on a
plain reading of the law. However, in a recent judgment, the Income Tax
Tribunal in the case of Prema P Shah (Citation 282 ITR 211) has ruled
that the exemption offered by Sec. 54 can indeed be extended to a
property purchased in a foreign country.
The brief facts of the case were that the assessee claimed the
capital gains on sale of house property situated in India as exempt. To
support her claim, she filed a photocopy of a lease agreement for a
house in London. The assessing officer disallowed the claim noting that
Sec. 54 speaks of purchase of residential property or construction
thereof. In this case, Shah had purchased only tenancy rights and hence
exemption under Sec. 54 would not be available to her.
This argument was rejected by the Tribunal based on the facts
of the case. In the UK, property belongs to the Sovereign; citizens,
instead of being allowed to purchase, are granted long-term leases. In
the instant case, the lease was valid for 150 years -- in other words,
it was in perpetuity and for all practical purposes, the assessee was
the owner of the property.
It's not even necessary that the same amount of capital gains
be used to buy the property. The assessee can very well buy the
property even on mortgage (housing finance) -- as long as the
conditions specified in Sec. 54 are satisfied, the exemption is
available. This is because, even for properties bought using mortgage,
the borrower instantly becomes the owner of the property.
That he is paying his EMIs (mortgage) on the loan taken is an
agreement between the lender and the borrower inter se. It has no
bearing on the ownership of the property. In other words, as far as
Sec. 54 is concerned, an investment has indeed been made in property.
Whether it's through the mechanism of mortgage or otherwise is
immaterial.
This judgment will have far reaching impact, especially on NRI
investments and taxation. No one is born an NRI. Indian residents
become NRIs when they go abroad for employment or business. More often
than not, such persons own property in India, either the one they left
behind when they went abroad and became NRIs, or one that is inherited.
A number of such persons, who have set up a new life abroad
definitely don't need a new property just to save on tax. Now, such
persons can actually consider buying property abroad and claiming tax
benefits in India.
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